COSTA RICA: Interest rate adjustments. Right direction, but “too little…too late”

CENTRAL AMERICA - In Brief 02 Nov 2018 by Francisco de Paula Gutierrez

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On Wednesday October 31st, The Central Bank increased its whole spectrum of interest rates, in order to tackle two different, although related, problems. In doing so, the Bank´s president Rodrigo Cubero reaffirmed the control of inflation as the main objective of its policy under the current inflation-targeting regime. The movement is certainly in the right direction, but it is “too little and too late”, specially taking into account the upward trend of international rates observed throughout the year and the loss of $1.1 billion in the Bank´s international monetary reserves during the June-October period. The first problem faced by the Bank is the increase in inflationary expectations. Through the year, expectations have been in the upper part of the target inflation range (2.0% - 4.0%), despite that actual inflation rate was very close to the lower limit of the range.As the exchange rate increased in the last two months, inflationary expectations have been moving upward and they are now at 3.9%, almost at 4.0%. Hence, in order to reduce the risk of accelerating inflation, the Bank increased its monetary policy annual rate, from 5.00% to 5.25%. The second problem faced by the Bank is the faster depreciation of the CRC: While the exchange rate remained stable during the June-July period, at around 568 colons per dollar, it reached 620 by October 31st, a 9.1% increase in the last three months. Given the relative openness of the economy, this acceleration will push up the future inflation rate. Bank´s decision, by increasing the rate for its electronic deposits, aims to shift preferences from dollar denominated deposits to colons denominated ones, and thus, reduce the ne...